Contracts with Wishful Thinkers |
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| Authors: | Giovanni Immordino Anna Maria C. Menichini Maria Grazia Romano |
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| Affiliation: | 1. Dipartimento di Scienze Economiche e StatisticheUniversity of Naples Federico II, Via Cintia Monte S. Angelo, 80122, Napoli, Italy, and CSEF;2. Dipartimento di Scienze Economiche e StatisticheUniversity of Salerno, Via Giovanni Paolo II, 84084 Fisciano (SA), Italy, and CSEF |
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| Abstract: | In a setting with a wishful thinking agent and a realistic principal, the paper studies how incentive contracts should be designed to control for both moral hazard and self‐deception. The properties of the contract that reconcile the agent with reality depend on the weight the agent attaches to anticipatory utility. When this is small, principal and agent agree on full recollection. For intermediate values the principal bears an extra cost to make the agent recall bad news. For large weights, the principal gives up on inducing signal recollection. We also extend the analysis to the case in which the parameter of anticipatory utility is private information. |
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